Bitcoin’s Bigger Problem

On Saturday August 15 2015 the ongoing debate regarding Bitcoin’s maximum block size capacity entered a new phase with the release of Bitcoin XT 0.11A. The software of Bitcoin XT was forked from Bitcoin Core (the original Bitcoin protocol), and mainly addresses Bitcoin Core’s scalability problem. In Bitcoin Core the maximum block size is capped to 1MB, severely limiting the amount of transactions that can be processed by the network. The network is commonly quoted to be able to handle seven transactions per second at best. This limit has already caused delays in the processing times and an increase in the average transaction fee paid, in order for transactions to receive priority and avoid getting “stuck”.

The previous appears to have resulted in a broad support for raising the block size limit (or at least improving Bitcoin’s scalability), yet, the community has so far disagreed on how this should be managed. This is what has led XT developers Mike Hearn and Gavin Andresen to take matters in their own hand, and release a patched version of Bitcoin Core. The final product, Bitcoin XT, raises the block size limit to 8MB (and will continue to increase) which is intended to relieve the network from the most immediate pressure. For now, however, both Bitcoin Core and XT will run on the same underlying blockchain. This will continue until Bitcoin XT accepts a block larger than 1MB, that will be rejected by Bitcoin Core due to its limitation. When this happens, the blockchain would automatically be forked as well and both chains will continue on separate paths. For anyone that owns Bitcoin before this fork happens, it means that they will own the same amount of coins on both ends of the fork.

Centralized Governance

The forked software could thus potentially solve Bitcoin’s scalability problem, but it would leave Bitcoin with a much bigger problem in return. If successful it would prove that it only requires two developers to influence the direction of Bitcoin, which is a form of highly centralized governance and a major blow to Bitcoin’s original model of decentralized governance. The XT protocol itself also introduces a new governance mechanism, but this is less relevant considering the implications of a successful fork. This outlook is so gloomy that it prompted the return of Bitcoin’s founder Satoshi Nakamoto after an absence of four years. Satoshi stressed that Bitcoin was not intended to be controlled by certain individuals.

“When I designed Bitcoin, I designed it in such a way as to make future modifications to the consensus rules difficult without near unanimous agreement. Bitcoin was designed to be protected from the influence of charismatic leaders, even if their name is Gavin Andresen, Barack Obama, or Satoshi Nakamoto.”

Satoshi continued to emphasize that he would consider Bitcoin a failure should the attempted fork turn out to be a successful one.

“If two developers can fork Bitcoin and succeed in redefining what “Bitcoin” is, in the face of widespread technical criticism and through the use of populist tactics, then I will have no choice but to declare Bitcoin a failed project.”

To some extend Satoshi’s remarks seem paradoxical, because by issuing these statements he appears to be trying to influence something that he should not be able to influence according to himself. Nevertheless, Satoshi could be right to consider Bitcoin a failure if its governance structure is vulnerable to this kind of “attacks”. It would mean that Bitcoin’s governance model is weaker than the average “bankchain”, where the blockchain is under centralized control by a single or group of (trusted) institutions. By comparison, a successful fork means that in theory anyone (including selfish and/or malicious persons) would be able to take control of Bitcoin’s future.

Biggest Threat

Even if Bitcoin XT fails, Bitcoin Core still has a bigger problem than its scalability. After all, Bitcoin XT is nothing but a symptom of the inability of Bitcoin’s community to decide on the way forward. For a long time, the community has already been kicking the can on Bitcoin’s scalability in a similar fashion to Europe’s dealing with Greece. In essence, this is the result of the scalability problem not being a purely mathematical or simple debugging exercise. The variations in desired methods to address the issue and variety of expected outcomes are as diverse as the number of people involved, none of which can be properly tested. Some still argue that nothing should be changed at all due to the precedent it may set, or the impact it may have on security. But, as once again confirmed by Satoshi, any change decided on is subject to a high threshold of unanimity.

Bitcoin’s decentralized nature and accompanying large number of participants combined with this threshold have led to stagnation in group decision making. It should be no surprise that this leads to tensions within the community, and subsequently to two members that try to take matters in their own hand. It reveals Bitcoin’s biggest problem, a lack of flexibility and an effective governance mechanism that can only be partially hidden behind fancy rhetoric and patches such as side chains. These traits do not fit within a highly dynamic environment, leaving Bitcoin unable to adequately anticipate on changes and raising the question whether Bitcoin will be able to respond to changes in time at all.

Supporters of the current process will argue that the required threshold encourages the search for an optimal solution, believing that unanimity is possible under the right circumstances while strengthening group relationships during the collaborative effort put into finding a solution. These supporters turn a blind eye on the fact that the “right circumstances” have historically typically been a crisis situation, pretty much like in the way European creditors finally reached consensus on a deal for Greece. The latter process did nothing but leaving most participants frustrated.

In the cryptocurrency world Dogecoin provides an example a little closer to home, as it faced similar stagnation in its decision making process last year. The debate did not concern scalability, but focused on Dogecoin’s block rewards running low by the end of the year. This was increasingly becoming a network security risk due to a falling hashrate. For months, Dogecoin’s community feverishly searched for a solution. Several solutions were proposed, but most only raised tensions and anxiety surrounding the coin’s future. Eventually the developers decided to implement the most basic solution of enabling merged mining with the Litecoin network at the height of the crisis, a solution that had already been proposed in the early days of Dogecoin. By the time it was finally implemented the discussion had been one of the reasons why Dogecoin’s once happy community turned sour, while also significantly reducing the value of the digital currency. Unsurprisingly, it left a lot of people feeling frustrated. The damage had been done, and Dogecoin never returned to its pre-crisis levels.

The previous emphasizes why not scalability, but Bitcoin’s current governance mechanism presents the biggest threat to its future. And with Bitcoin’s block rewards inevitably running out and a constantly changing IT environment, the current debate is unlikely to be the last of its kind.